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California Leads NatGas Cash Higher; Futures Follow Suit

Next-day natural gas prices staged a broad advance in Monday's trading, led by advances at California points, while none of the locations followed by NGI tracked in the red. The NGI National Spot Gas Average rose 12 cents to $2.60, and California points averaged advances of close to 30 cents.

A return of warm temperatures to the Desert Southwest was enough to not only elevate next-day gas prices but also next-day power quotes and predicted loads. Despite the ongoing pressure on petroleum prices prompted by the Brexit-led stronger dollar, natural gas futures remained solidly in the black.

At the close, the soon-to-expire July contract had added 5.4 cents to $2.716, and August had risen 4.7 cents to $2.741. August crude continued its losing ways, dropping $1.31 to $46.33/bbl.

Next-day gas in California vaulted higher as above normal next-day temperatures and higher power prices made incremental purchases of natural gas economically sound. AccuWeather.com forecast that Monday's high in Los Angeles of 90 would climb to 92 Tuesday before easing to 89 on Wednesday, 8 degrees above normal. A high in Phoenix of 111 Monday was seen easing to 109 Tuesday and 107 Wednesday, still a degree above normal.

Gas at Malin was quoted 20 cents higher at $2.72, and packages to the PG&E Citygate jumped 31 cents to $3.07. Deliveries to SoCal Citygate added 26 cents to $3.11, and gas priced at the SoCal Border Avg. Average rose 26 cents to $2.92. Kern Delivery changed hands 25 cents higher at $2.91.

"The most expensive gas in the country is in Southern California,” said NGI markets analyst Nate Harrison. “PG&E Citygate is showing the largest daily gain since the beginning of the month. PG&E basis to the Henry Hub broke into positive territory in trading on June 17 and seems to have plans to stay there. The forward curve there is showing plus-32 cents for July as of Friday trading."

AccuWeather.com meteorologist Ken Clark said “triple-digit heat” would return to parts of Southern California, while “excessive heat will become likely in the Central Valley of California with some areas getting to, or just past 110 degrees F.

High temperatures were forecast to reach “the low 110s F in places such as Las Vegas and Phoenix, which is still above average by 5-10 degrees, [and] downtown Los Angeles may hit 90 F on multiple days early in the week. While temperatures are not expected to reach the same levels as the heat wave that hit earlier this month, residents should still take precautions and remain vigilant of the high wildfire danger."

Clark warned that "another round of sizzling heat” was threatening to aggravate the ongoing wildfires across the southwestern United States through early this week.

“The massive Erskine fire, burning about 40 miles east of Bakersfield, CA, has already claimed two lives,” he said.

Without ready access to stored gas at Aliso Canyon, SoCalGas has resorted to much more intensive management of production and consumption on its pipeline.

"The frequency of OFOs has greatly increased," said a Southern California manufacturer of building materials. "We are getting OFOs on the same day. I don't have to balance every day, but often there are typically two or three OFOs that do the same thing. The problem is that we will get an OFO for that day, and we are already into the day and have scheduled labor, materials, etc."

CAISO is expecting a peak load Tuesday of 45,568 MW, well above Monday's forecast peak of 42,700 MW.

Other market centers were strong as well.

Gas headed for New York City on Transco Zone 6 gained 41 cents to $2.29, and gas at the Chicago Citygate added a dime to $2.70. Deliveries to the Henry Hub rose 9 cents to $2.76, and gas on El Paso Permian gained 16 cents to $2.67.

Risk managers see a ripe opportunity for producers to establish forward hedges.

"Over the past few weeks, the nearby contracts gained significantly relative to the deferreds," said DEVO Capital President Mike DeVooght. "We continue to see good sell interest when the long-term strip approaches the $3.00 level. Now that we have seen the short-covering rally we thought was possible, we feel current levels represent attractive levels for producers to start to establish forward sales. But since we are not that bearish, we would establish hedges with either floors or collars."

DeVooght counseled trading accounts and end-users to stand aside, but producers should "hold an August-July $2.70 put and short a $3.50 call at flat or hold a $2.75 put and short a $3.75 call paying 7 cents."

Near-term weather forecasts turned cooler over the weekend.

"Near to cooler than average period anomalies are forecast across the Northeast, Midwest, southern Plains and into portions of the southwestern U.S.," said WSI Corp. in its Monday morning six- to 10-day outlook. "The remainder of the West, as well as Texas and the Gulf Coast, will likely run warmer than average.” Monday’s forecast was “cooler than Friday's forecast over much of the West and Plains. Texas and the Gulf Coast are warmer.” Continental U.S. population-weighted cooling degree days were off 0.9 to 56.8 for the period.

Overall forecast confidence was “average” on Monday, but it was decreasing by the end of the period, WSI said. “Medium-range models are in good agreement with the eastern trough and cool conditions, but there are key differences late in the period over the western U.S."

Forecasts come with inherent risks. "There is minor upside risk to the hot weather across Texas into the southwestern U.S.,” WSI forecasters said. “The eastern U.S. has a cooler risk, mainly during the front half of the period. The Northwest and northern Rockies could run cooler late."

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